Question

Case Study: The Flower Shop

Anastasia owns a successful flower shop. She has been in business for four years and enjoys a good reputation in the community. She is a good marketer and good manager. The shop is in a prominent location with an ample parking lot which thus provides good foot traffic for the business. The shop is opened six days a week from 10am to 5pm. Recently, she has been thinking about extending the flower shop's hours an extra three hours per opened day. She anticipates the cost to be consistent with historical averages and can forecast a realistic revenue stream. The costs for the flower shop include the fixed cost of the building lease which is $2,100 monthly along with interest on loans of $400 per month. The electricity and utilities on a monthly basis average $250. She views this cost as fixed as the heat and refrigeration systems are always on. The additional hours of lights are considered negligible. The gross cost of compensation, which include wages and benefits, for an hour of labor is $15 per person. She is a good trainer which means she will not need to be on site for all extended hours. The average customer transaction in the store is $56. She uses this number to estimate the per dollar average variable cost of bringing the raw flowers for sale per customer at 30 cents (.30). She further estimates the per dollar average variable cost of presentation (ex. Wrapping, vase, etc.) at 35 cents (.35). She estimates that the additional revenue generated for the extended hours on an average basis will be as follows:

Additional Hours: Average Hourly Revenue:

5pm to 6pm $200

6pm to 7pm $140

7pm to 8pm $60

Q1: Do you think Anastasia is correct in treating the electricity and utilities costs as fixed? Explain your Answer.

Q2: Describe the different types of cost you believe Anastasia hopefully included in developing her per dollar average variable cost of bringing the raw flowers to market estimate.

Q3: Why do you think Anastasia is using per dollar average variable cost

figures and not marginal cost? Do you agree with her approach?

Q4: Assuming she needs two employees to staff the store each hour, would you recommend that Anastasia move forward and extend the flower shop's hours?

Q5: Describe the opportunities and challenges might encounter in extending the flower shop hours.

Q6: Are there other solutions available to Anastasia besides extending the shop

hours to increase her business's profitability?

Q7: Given the information in the case study and all your answers,

if you were Anastasia, what course of action would you take to expand and increase the

profitability of her business? Support your decision.

Q8: How would you evaluate the effectiveness of your decision in question seven?

Answer 1

1. The decision taken by Anastasia to consider electricity and utility cost as fixed is correct .  However, with a retail store that is open 10 to 5 per day, the electric bill is going to be relatively the same even if a customer never enters the store.  Electricity and utility bill is fixed cost, as the usage remains the same no matter what and does not affect profit.

2. The different types of cost you believe Anastasia hopefully included in developing her per dollar average variable cost of bringing the raw flowers to market estimate. It include average customer transaction in store, cost of labour, cost of wrapping and presentation.

4. The decision of Anastasia to recruit the two more employees is correct as the business is expanded , which will increase the stress on existing employees . a rapid expansion can mean many added hours on the job which may contribute to increased stress, and a drop in morale and performance. No business can afford such negative consequences for very long, especially in industries where staff play such an important role in customer satisfaction

5. Opportunities might encounter in extending the flower shop hours:-

• increase your resources and stock
• generate more sales and profits
• reach new customers or markets
• put more money back into your business
• influence market price
• reduce external risks (eg from competition, market or technology changes)
• Economies of scale
• New customers will attract

Challenges might encounter in extending the flower shop hours:-

• shortage of cash
• loss of control
• increased capital requirement
• increased staff turnover
• compromised quality